There is an increase in military expenses to be quite different in Europe
Importantly, the government debt forecast of scope rating is based on different rates of increase in defense spending. Governments of Central and Eastern Europe are expected to increase their efforts, while Southern European countries (eg Portugal and Italy) and/or important fiscal obstacles (such as Belgium and France) are likely to adopt a more gradual approach. Recently, Spain’s decision to get out of NATO’s commitment exposes this deviation in danger perceptions.
From the perspective of credit rating, any assessment is also beyond compliance with fiscal rules alone. The scope focuses on the wide fiscal trend of the sovereign, and thus budget balance, stability of interest payment, and medium -term loan trajectory.
The high defense expenditure will lead to the deteriorating sovereign debt-to-GDP trajectory in high-borrowing and most European Union countries, and thus weak sovereign credit profiles, until the government reduces spending or does not increase revenue.
Financial defense and security emerges at the European Union level
Given the limited fiscal location between several European Union member states, the financing of security and defense may also move towards European level. Centralizing the security and defense financing of the European Union can provide more sustainable and coordinated financing in the European Union member states, while also building economies of scale in defense and security procurement. Such a step would lead to an important political step towards deep European integration.
To address the issue, the European Union has adopted regulation to establish security action for Europe (safe) initiative that will provide additional EUR 150BN line to member states. Funded through loans issued by the European Union, the member states will offer loans with a possible advantage in terms of reducing the secure loan cost and expanding maturity, with a 10 -year grace period for loans of maximum period of 45 years and a 10 -year grace for major repayment.
The implementation of the program is expected to increase the European Union’s bond release (EUR 662BN until June 2025) and a large part of the European Union budget needs to be spent on interest repayment, especially the next multi-annual financial structure starts at 2028-35.
Other European Union initiatives, including the European Defense Industry Program (EDIF), which can provide EUR 1.5BN in grant by the end of 2010, will focus on improving border cooperation in defense procurement, strengthening the supply chains of defense industry and increasing manufacturing capabilities.
The proposals also include the construction of a dedicated European rearmament bank prepared on institutions such as European Bank for Reconstruction and Development (EBRD). The bank will be funded by the coalition of interested states-both the European Union and the Non-European Union NATO will contribute to the initial capital, allowing them to take advantage of their capital through the issuance of bank bonds. The bank may offer defense procurement, and defense companies to lend directly to governments to expand industrial capabilities.
Nevertheless, another proposal is a comprehensive defense, safety and flexibility (DSR) bank establishment, aimed at supporting strategic stock-pelting in joint purchases, manufacturing scale-ups and equal ideology colleagues, including a trans-vibration and Indo-Pacific partner.
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Eiko Sievert is an executive director in sovereign and public sector ratings Scope rating, Alvis LankarSovereign and Managing Director of Sovereign and Public Sector Rating in Scope, and Brian MarleyThe senior analyst in the sovereign rating in the scope rating contributed to the draft of this comment.
